Why banking startups are rolling out crypto products

Banking startups are using crypto products to reach millennials and Generation Z

Despite a flurry of interest, many are still taking a cautious approach as regulatory frameworks evolve

Suman Bhattacharyya | May 24, 2018

Crypto is everywhere, and startups see it as a way to get a leg up over the big banks.

U.K.-based Revolut revealed Wednesday that it will be adding Ripple’s XRP to the roster of cryptocurrencies already on its platform, and SoFi CEO Anthony Noto told CNBC Tuesday that the company plans to offer its customers the ability to invest in crypto next year, either through a SoFi-built solution or a partnership of some kind.

Banking startups, with their eyes on potential millennial and Gen Z customers, now view crypto offerings as necessities. While Revolut and SoFi may be early movers among banking startups, startup investment companies like Robinhood and Circle are already rolling out product offerings for crypto investors. Unburdened by legacy technology and the same level of regulatory oversight as their incumbent cousins, banking startups are looking to a future where crypto is mainstream, and they want to get in front of the movement to stay competitive.

SoFi declined to comment for this story, while Revolut did not respond to a request for comment.

“This is definitely about positioning themselves as forward-looking companies, putting customers first, and it gives [banking startups] an opportunity to experiment with crypto on their own platforms,” said Ryan Gilbert, a partner at San Francisco-based Propel Venture Partners. Rolling out crypto products also lets them test the corners of regulation, he added.

Putting the customer first, for banking startups, means addressing the desires of a crypto-friendly younger customer base. Younger customers want more choices to determine their financial paths, including possibilities to hold and invest in crypto.

“If Wells Fargo said they were adding crypto, 99 percent of their customers would be like, ‘So what?'” said Malcolm CasSelle, president of the Worldwide Asset eXchange, the organization behind WAX tokens, utility tokens that allow virtual goods to be tokenized and exchanged for cryptocurrency. “Millennials who don’t trust big banks are using new-age apps for finance, and it’s like the marketing and product departments [of banking startups] are saying, ‘Hey, let’s get in alignment with the customer.'”

Banking startups have three advantages over incumbents in rolling out crypto offerings. They don’t have legacy technology or infrastructure; they aren’t regulated like established banks; and there are a lot of bankers interested in crypto who are flocking to startups. As payments and lending become increasingly commoditized, crypto offerings are part of a differentiation strategy, said Josh Hawkins, Circle’s svp of global corporate communications.

Incumbent banks, so far, are testing the frontiers of blockchain technology’s application to financial services, but they aren’t ready to give consumers access to crypto. For example, Spanish banking giant Santander last month launched One Pay FX, a mobile payments service for its U.K. debit card holders who want to send payments to people in Euro Zone countries and the U.S. It doesn’t use cryptocurrency XRP; instead, it uses Ripple’s xCurrent protocol. The same month, JPMorgan Chase tested a new application on its in-house developed blockchain Quorum to handle financial instruments.

Some challenger banks are taking a “wait and see” approach, while staying open to future possibilities. Representatives from Varo and Chime both said they’re open to crypto offerings in the future, and Chime said it’s likely to offer exposure to crypto among the lineup of future investment products. U.K. challenger bank Starling is taking a more cautious approach, citing a lack of regulation and heightened risks.

“We keep abreast of the developments in blockchain, which as a technology we understand has many uses, one of these being for cryptocurrencies,” Starling CEO Anne Boden said in an email. “Starling does not currently support cryptocurrencies and we believe that significant steps need to be taken in regulation before they really become viable because of the huge risk anonymous trading poses. Recent fines and associations with criminal funding on the dark web have clouded the industry.”

Younger customers are more interested in dabbling in crypto than older ones. Chime found that last year, its largely millennial customer base spent four times more money on Coinbase than traditional brokerages. It’s a trend that’s also being illustrated by college students who mine cryptocurrency in their dorm rooms or recent research showing that nearly a third of millennials would rather invest $1,000 in bitcoin than government bonds or stocks.

“It’s a land grab and a test for technology, and it’s a focus on trying to understand what customers want and what will be sticky for customers,” said Gilbert.